Lecture 11 Slides with Solutions to Practice Exercises
Management Accounting Overview
Course: ACC5040 Semester 1 – 2024/25
Lecture 11: Chapters 16 & 17 – Standard Costing & Variance Analysis
Instructor: Dr. Sarah G. Mohamed (Sarah.Mohamed@bcu.ac.uk)
Session’s Agenda
Discuss Moodle Quiz 3
Review key takeaways from Chapters 16 & 17
Additional practice exercises
Assess the use of standard costs & budgeting
Moodle Quiz 3 Details
Date: Thursday 12th December 2024
Open: 10am Thursday 12th
Closes: 10am Friday 13th
Duration: 40 minutes
Content Covered:
Chapter 15: The Budgeting Process
Chapters 16 & 17: Standard Costing and Variance Analysis
Associated lectures and seminars (Lectures 7-10 and Seminars 8-11)
Format: 15 multiple-choice questions, combining numerical exercises and theoretical questions.
Quiz Instructions
Quiz is available for 24 hours; complete in the allotted time once started.
It is an open-book quiz but must be completed individually.
Review course content and practice exercises before the quiz.
Students requiring extra time must email by Monday 9th December, including supporting documents.
Key Takeaway Points from Chapters 16 & 17
Static Budget
Definition: A static budget refers to the Master Budget and is a planning device based on fixed budgeted output levels determined at the budgeting period's beginning.
Calculation: Static Budget = Budgeted Output Level (BO) x Budgeted Price (BP).
Level 1 Variance Analysis
Formula: Actual Results - Static Budget Amount = (Actual Output x Actual Price) - (Budgeted Output x Budgeted Price)
Also Known As: Static/Fixed Budget Variance.
Total Variance Calculation: Total Static Budget Variance = Actual Income - Static Budget Income.
Flexible Budget
Definition: A flexible budget calculates budgeted revenue and costs based on actual outputs.
Formula: Flexible Budget = Budgeted Price (BP) x Actual Output (AO).
Facilitates calculations for Level 2 Variance Analysis.
Level 2 Variance Analysis
Formula: Flexible Budget Variance = Actual Results - Flexible Budget Amount.
Insights Gained: Shows variance attributed to changes in actual unit costs and prices from budgeted ones.
Sales Volume Variance Calculation: Sales Volume Variance = (Flexible Budget Amount - Static Budget Amount).
Level 3 Variance Analysis
Applicable to all product costs; direct materials and labor have price and efficiency variances.
Direct Material Variances:
Price Variance = AQ x (AP - SP)
Efficiency Variance = (AQ - SQ) x SP
Direct Labor Variances:
Price Variance = Actual Hours x (AR - SR)
Efficiency Variance = (Actual Hours - Standard Hours) x SR.
Link Between Level 2 & 3 Variance Analysis
Flexible Budget Variance can be derived from either analysis, showing equivalencies between them.
Fixed Overhead Cost Variance
Fixed Costs Spending Variance = Actual Total Fixed Costs - Budgeted Total Fixed Costs.
Benefits of Using Price and Efficiency Variances
Helps management understand differences between actual and planned production costs due to price changes and input levels.
Practice Exercises
Case Study: Apple Valley Orchards, Inc. (AVO)
Standard costs for AVO's Grandma's large apple pie developed in 2023.
Budgeted Costs: Direct materials: 1.5 pounds at £7.25/pound; Direct labor: 0.25 hours at £14/hour.
Production in September: 1200 pies, utilizing 1875 pounds of materials and 280 labor hours.
Various Calculations:
Material Flexible-Budget Variance Calculation: £75 unfavorable.
Material Price Variance Calculation: £468.75 favorable.
Material Efficiency Variance Calculation: £543.75 unfavorable.
Direct Labor Price and Efficiency Variances calculated to manage labor costs effectively.
Assessing the Use of Standard Costs and Budgeting
Standard costs facilitate detailed variance examinations and offer insights into operational performance.
Comparison Use: Variances serve as early warning signs for managers and can influence performance evaluations and strategic decision-making.
Using Sensitivity Analysis with Budgeting
Sensitivity analysis examines how results vary with changes to predicted data; useful for understanding the impact of varying parameters.
Issues with Budgeting & Standard Costs
Potential problems may arise concerning human behavior, such as budget manipulation by employees.
Budgetary Slack: Intentionally underestimated revenues or overestimated expenses to make budget targets easier to achieve.
Limitations of Variance Analysis
Focus solely on financial performance can neglect critical non-financial metrics.
Risk of exacerbating employee anxiety while undervaluing their contributions, potentially leading to the loss of skilled workers.
Preparation for Next Week
Complete seminar 12 exercises on Moodle; attend lecture 12 on Tuesday, 10th December for final exam format and preparation guidelines.